Navigant Research Blog

Explosive Growth Drives India’s Smart Cities Movement

— January 19, 2015

In June, Prime Minister of India Narendra Modi announced the country’s goal for the development of 100 smart cities.  Fundamental to this vision is the development of smart buildings.  According to a recent article by Surabhi Arora, director of research services for Colliers International, “The advantage of following smart building concept is that they can be considered as future-proofed assets. … The shift to smart buildings has only just begun, and will now accelerate very quickly with proactive government support.  It is the time for forward-thinking developers and landlords to prepare themselves to lead, rather than follow, the change.”

My colleagues James McCray and Lauren Callaway recently commented on the drive to create a more resilient and smarter grid in India.  As with that effort, India will face some inevitable challenges on the path toward developing smart buildings.  According to the United Nations, Indian cities will see populations burst with an additional 404 million people by 2050.  This rate of urbanization will put unprecedented pressure on city infrastructure and resources.  Smart city and smart building goals speak to the priorities for sustainability, climate change readiness, and human welfare, but economic commitments will be critical to see these objectives come to fruition.

Outside Forces

The international community has recognized the opportunities in India, and Japan, the United States, and Singapore are major government allies for the Indian smart cities agenda.   According to an article in Forbes, the Delhi Mumbai Industrial Corridor (DMIC), a 1,000 kilometer stretch between Delhi and Mumbai, will be a major focus of the smart cities development plan.  It’s projected that the new manufacturing and commercial centers within the smart cities will require upwards of $90 billion from international investors.  The smart city development in this corridor is integral to the nation’s vision of becoming the “Global Manufacturing and Trading Hub,” according to the DMIC Development Corporation, the government partnership between India and Japan.  The international interest for participation in the development of these smart cities also stems from major technology companies such as Microsoft and IBM.

A Chicago a Year

The Indian government is pushing the smart city agenda forward through an important round of stakeholder planning meetings that began at the end of December.  The government recognizes that accomplishing its vision will be no small feat; as one government official explained, “a new Chicago needs to be built every year.”  The political commitment, international interest, and growth demands in India represent a major opportunity for smart building technology companies.  India’s smart cities movement could demonstrate how smart buildings deliver significant cost savings through energy efficiency and strategic facilities management, and could become a hub for the spokes of the smart city infrastructure.

 

How Oversupply Could Benefit the World Oil Market

— January 19, 2015

For economists, it has been fascinating to watch what’s been happening in the oil & gas market since OPEC’s meeting in November, when it decided (driven by Saudia Arabia) to maintain production of 30 million barrels of oil per day.  This decision, combined with the sharp rise in U.S. production and a decrease in demand driven from China’s slowing economy, has sent oil prices to their lowest levels since May 2009.  Saudi Oil Minister Ali al-Naimi has explained that OPEC’s reason for maintaining the production level is to recoup market share lost to what he considers high-cost or inefficient non-OPEC oil producers, such as Russia, Brazil, and Canadian tar sands producers.  Of course, there’s also a geopolitical side to the story, but let’s take a deeper look at the situation in economic terms.

The demand for oil is fairly inelastic to price; that is, as the price changes, demand stays relatively consistent, especially in developed countries.  As such, OPEC has been able to essentially set the price of oil by choosing how much to produce.  Over the past 5 years, however, non-OPEC oil production has exploded, especially in the United States.  The country, which was OPEC’s biggest customer only 10 years ago, is now the world’s largest producer of total oil (crude and natural gas liquids) and moving toward self-sufficiency.

Consumers’ Delight

OPEC has typically responded to increases in non-OPEC oil supply by cutting its own production in order to keep the price of oil above $80 per barrel.  Now it appears the oil market and OPEC have reached a turning point as the huge influx of supply and a slowing of demand growth from China and Europe (among other reasons) have sent the price of oil on a steady decline since June.

At the meeting in November, OPEC ministers faced unenviable choices.  They could cut production in order to raise the price of oil and increase their margins in the short term, but this would not have served them in the long run.  If only OPEC cuts production, not only do their competitors share the benefit of higher margins, but also OPEC concedes more market share.  Instead, OPEC decided to forego profits in order to thin out the herd.  By declining to cut production, the Saudis hopes to drive higher cost producers out of business while giving oil-consuming economies a shot in the arm.

Thinning the Herd

As my colleague Richard Martin has pointed out, the stronger members of OPEC (i.e., Saudi Arabia and Kuwait) can likely withstand drastic price declines, while the weaker members (Venezuela, Iran, Nigeria, and Algeria) could face economic disaster.

The current market trajectory will end up benefiting those countries that have a comparative advantage in oil production, as it should, and it’s likely that the market will be left more efficient and better off in 2 to 5 years as a result.  According to some, the U.S. might actually be better positioned for a price war than Saudi Arabia, which as a society has grown accustomed to the benefits of $100/barrel oil.  According to Naimi, we may never see $100/barrel oil again.  As far as he’s concerned, Saudi Arabia and OPEC will see this price war through, regardless of how low it goes: “Whether it goes down to $20, $40, $50, $60, it is irrelevant.”

As for the effects of all this on the natural gas market and renewables, that’s for another blog.  The December issue of Navigant’s NG Market Notes includes a great infographic about the breakeven prices of oil for producers around the world.

 

Fast EV Chargers: Still Seeking a Market

— January 16, 2015

DC charging stations provide a significant benefit to electric vehicle (EV) drivers by allowing them to recharge in 30-60 minutes.  But while the market for DC chargers is growing, it is doing so at a relatively slow pace, thanks to the cost and complexity of deploying the chargers. A new report by North Carolina-based firm Advanced Energy on its DC fast charging deployment coordination project describes how the company found five hosts to deploy DC fast charging stations, provided for free of charge by Advanced Energy.  The report serves as a useful primer on EV charger installation generally and fast charging specifically.  It also gives a sense of how the public charging infrastructure market, while continuing to grow in key markets, is still in an early adopter phase that requires infrastructure companies to spend significant resources educating potential customers and guiding them through the planning and installation of EV charging.

Advanced Energy launched this initiative to deploy up to 10 DC fast charging stations for public use in North Carolina in March 2013.  Sixteen host sites applied for the equipment, with five ultimately installing it.  The site selection process highlights the practical considerations that must be taken into account by businesses interested in offering DC charging.  In this program, host sites are responsible for both installation and operational costs.  With installation costs expected to range from $20,000 – $60,000, a free charger becomes much more expensive.  Not surprisingly, these costs were two of the top factors that prevented some applicants from deploying stations.

The Cost of Power

Installation is also a barrier for Level 2 commercial charging, as the cost of trenching or boring from the charger site to the electrical breaker box are significant for any type of charger, Level 2 or DC.  Limiting the distance from the circuit breaker to the charger is essential to minimize installation costs, but it’s not the only consideration.  The site also has to be one where a DC charger, with its large footprint, can fit without reducing the parking space.  The report also recommends that the chargers be placed away from other infrastructure and nearby trees.  And of course the spot must be readily accessible by drivers.

In addition, the DC charger’s power requirement is a major cost factor.  The chargers use three-phase 240V or 480V input; if the site is not already equipped for this, it is a significant added expense.  Then there is the issue of ongoing power demand.  Thirty-kilowatt (kW) and 40 kW DC chargers run the risk of triggering demand charges for customers if they exceed a certain level under their utility rate agreement.

Successful But Unprofitable

The good news is, the sites that installed chargers are seeing rapidly increased utilization.  Two spots — a large retail outlet and a municipal center – reported around 500 sessions combined in the third quarter of 2014, up from 350 over the previous two quarters.  Energy demand per session has also risen.  Note that the stations are currently free to use; nevertheless, given that this is very early in the deployment of these stations, and there are fewer than 3,100 PEVs in all of North Carolina.  The success of these DC chargers provides evidence that, if you install them, drivers will come.

This conclusion is also supported by the experience of the first fast charger deployed on the Chargepoint network. The 25 kW Fuji fast charger, operated by charging services company Evoasis, was installed at a Marriott in San Juan Capistrano, roughly halfway between San Diego and Los Angeles. After 18 months, Chargepoint reported that the station had delivered 2,900 charging sessions.  While the station was free for the first few months, Evoasis began charging $10-15/hour in early 2013. Usage remained steady and Chargepoint reports that the station generated $10,000 in revenue over its first 18 months.

However, the 250 sessions a quarter reported for the North Carolina stations is less likely to make DC charging adoption look like a profitable enterprise for the near-term, given the expected cost of $30,000-$60,000 to purchase and install.  At this stage of the EV market, DC charging will likely require either innovative financing options – perhaps leasing to own or financing with no interest; offsetting incentives, either from government or programs such as this; or alternative revenue models like advertising.

 

The Energy Efficiency Way to Emissions Reductions

— January 15, 2015

The Obama administration has few levers to pull to shift the United States’ position on climate change, besides enforcing the Clean Air Act of 1970.  That legislation authorizes the U.S. Environmental Protection Agency (EPA) to enforce regulations on power plants and associated pollutants.  The Clean Air Act put the onus on individual states to design programs to follow the EPA’s federal guidelines.  Last June, the EPA released its Clean Power Plan (CPP), with a new ambitious target: carbon emission reductions totaling 30% relative to 2005 emissions by 2030.  The proposed rule includes the following primary components:

  • Four building blocks that define the EPA’s Best Strategy for Emissions Reductions
  • State-by-state 2030 carbon emissions reduction targets and interim targets based on a 2012 base year
  • Numerous alternative emissions reduction strategies, including renewables, under-construction nuclear generation, and energy efficiency

Cost-Effective Efficiency

Not surprisingly, some legislators are arguing that the CPP is unconstitutional, functioning as a federalization of states’ activities via the EPA.  Some utilities are also not happy with the CPP, as they are going to have to be held to real climate goals.  Utilities that burn coal or other fossil fuels inefficiently will have to pay to upgrade their facilities or face stiff penalties.

In a recent white paper, Navigant reported that energy efficiency is a cost-effective way for states, utilities, and businesses to achieve the CPP targets, with considerably less investment than upgrading or building new power plants.  Of all the building blocks, energy efficiency is the only one that is not a form of generation.  From a cost perspective, energy efficiency is a highly competitive approach to offsetting supply requirements and reducing carbon emissions.   This approach can be used for both overall total load reductions, but also for peak shaving (i.e., reducing the carbon intensity of electricity demand at the times when the grid is dirtiest – usually in the afternoons).

The Challenges

The major challenge for using energy efficiency as a way to achieve policy goals lies in how and where it is implemented.  Utility energy efficiency programs are one approach, and are forecast to grow, according to the Lawrence Berkeley National Laboratory (LBNL).

Energy Efficiency Spending by Utilities

(Source: Lawrence Berkeley National Laboratory)

Many utility programs require 5 or 6 years to mature and develop savings streams that persist.   Developing efficiency programs today will allow the savings potential to grow prior to the start of the CPP requirements.

It’s not just up to the utilities.   By focusing on the bottom line – the financial savings – the business community can help states achieve their CPP goals, whether they realize it or not.  Navigant Research’s report, Energy Efficient Buildings: Global Outlook, found that the current energy efficient building market is generating over $300 billion annually and is expected to grow, in major part, because the software and hardware works, and saves end-users money.  If the EPA uses the green of a dollar to promote the CPP, it could help states reach its targets.

 

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